Video games have improved a great deal since Super Mario and Duck Hunt. In the early days of the Internet, Google, Amazon, and Facebook were seen as “up-and-coming companies developing technology in their garage”. That is also how video game companies were once seen. Nowadays, they are rapidly growing corporate companies worth billions of dollars.
Of course, this is directly reflected in the growth of these companies. The gaming industry has grown over the last 20 years through acquisitions and a focus on distribution channels. By 2021, it had become a USD 198 billion1 industry. Especially with giant companies acquiring small game developers and expanding their distribution channels, the industry's structure has changed considerably. This causes competition law to turn its gaze on gaming markets all over the world.
As concentration is increasing in the market, the risk of limiting inputs draws more attention in cases such as Sony's deal to acquire Bungie for USD 3.7 billion, and in similar transactions where console manufacturers acquire game studios to produce games only for them.
In addition, risks such as barriers to market entry and monopolistic pricing are also discussed. Browser games, cloud gaming, and in-app payment options are also among the topics that concern the gaming industry. Nevertheless, as in many sectors, acquisitions by large companies in the gaming industry are seen as one of the biggest reasons for structural changes.
A case of David v. Goliath?
In line with one of the biggest competition law concerns in the industry, many game developing studios are being acquired by industry giants like Microsoft and Sony. Sony has acquired more than twenty companies operating in the gaming industry since the year it founded PlayStation. More than ten of these transactions were in the past two years. In 2022, five of the six companies Sony has acquired are in the gaming or e-sports industry.
Microsoft has also taken over more than fifteen game development studios for its own brand, Xbox, most of them in recent years. An even more resounding case was Microsoft's agreement in recent months to acquire Activision/Blizzard for an astronomical USD 68.7 billion. This transaction sent shockwaves through the gaming industry. Together with this news, the possibility of Microsoft restricting its competitors from offering Activision games as part of subscription services has caused concern for both players and competition authorities.
The UK's Competition and Markets Authority (“CMA”) considers2 that this transaction could significantly restrict competition. Their statement cites concerns that Microsoft, through its post-transaction control over popular games such as Call of Duty and Overwatch, may harm its competitors in consoles, multi-game subscription services and cloud gaming services. The CMA acknowledges these concerns may require the initiation of a Phase II investigation. Microsoft and Activision's responses regarding these concerns are anticipated.
The US Federal Trade Commission (“FTC”) is another authority that is closely examining this transaction. In addition to the concerns included in the CMA's statement, the FTC announced that the consumer data to be collected in the merged companies and the risks related to the labour market are also evaluated within the scope of the review. The case is also under review by the Competition Board in Turkey as well as the EU Commission (“Commission”) and competition authorities in Australia, Brazil, China, South Korea, Japan, and New Zealand.
Turkey closely follows developments in the gaming industry
In Turkey, many new start-ups are established in the gaming industry each year. The industry is gaining more and more of the spotlight in Turkey with investments and acquisitions. A major indication is the acquisition of Peak Games3 by Zynga for USD 1.8 billion in 2019 and the fact that it is Turkey's first unicorn4. Dream Games, after being founded in 2019, became the fastest company to take the unicorn title in Turkey with the investments it received in June 2021. This year, Take-Two, which owns famous game development studios such as Rockstar and 2K, acquired Zynga—a significant player in the market for mobile games.
In the recent TakeTwo/Zynga5 decision, Turkey's Competition Board announced that three different market definitions can be made as PC games, console games and mobile games, with the assumption that there is no demand and supply substitution between them in the digital games industry.
In the Take-Two/Zynga decision, the Board emphasised that Zynga does not operate in the markets for computer and console games in Turkey. Therefore, the focus was on the mobile game market within the scope of the assessments. The Board concluded the market would not be significantly affected and the transaction has been approved.
However, it is also noted in the decision that Zynga is planning to release console games. Despite this and the possibility that Take-Two's remarkable strength in computer and console games may spill over to mobile games, focusing solely on the mobile games market may raise a question mark regarding the impact of the transaction on the industry globally.
This major shift in the industry could also soon include the acquisition of Ubisoft and Electronic Arts. According to recent news, companies such as Amazon, Apple, Disney and NBCUniversal are interested6 in acquiring Electronic Arts. Similarly, Ubisoft has attracted the attention of investment companies like KKR & Co. and Blackstone Inc. Therefore, it is obvious that the gaming industry's place in the world of competition law will continue to grow.
What is happening other than acquisitions?
- Of course, developments affecting the industry in terms of competition law are not limited to acquisitions. One of the most essential revenue items in the gaming industry is in-app sales. For this, Epic v. Apple, which is still on-going, has great importance. The allegations in this case include Apple preventing the use of a payment method other than its own in applications downloaded from the Apple AppStore and that it obtains a 30% commission from sales made. You can access our article regarding this case here.
- Wolfire v. Valve is another case that includes allegations concerning a 30% commission rate, which is stated to be the industry standard. Valve has a 75% share in the market with Steam Store, which is the main stop for gamers to purchase their games. Allegedly, Valve is using this power to force game manufacturers to give the lowest prices on the Steam Store via a “Most Favoured Customer” clause. It is further alleged that game manufacturers are unduly harmed by the 30% commissions taken from sales made on the platform. It is a matter of curiosity how the assessments to be made within the scope of both Epic v. Apple and Wolfire v. Valve and the global effects they will have.
- A recent case was seen in the news in the United Kingdom regarding Sony's alleged excessive pricing while selling its products and services to users via PlayStation and PlayStore. A commission rate of 30% being passed on to consumers is also noted in this case. As announced, Sony may need to pay GBP 67 to 562 per person, (a total of GBP 5 billion) in compensation.
- In June, CMA announced that it will conduct a market inquiry regarding browser games and cloud gaming. Cloud gaming removes the need for game developers to develop different versions of their product for different operating systems, allowing them to appeal to a wider audience. It also allows players to continue their games with different devices. The main concern of the CMA in this context is that Apple wants each game to be individually submitted to the Apple AppStore and to get Apple's approval. This puts an obstacle to cloud gaming services like Nvidia's GeForce Now or Microsoft's Xbox Game Pass Ultimate from developing apps that will give users access to each service's cloud gaming catalogue.
- Similar to the case filed against Sony in the UK, lawsuits against Apple and Google in Portugal and in the Netherlands regarding consumer harm due to their conduct in their relevant App Stores are still on-going.7 Since a significant part of Apple's AppStore revenues are derived from mobile games, most of said compensation will likely be in question for gamers.
- The Commission's decision in January 2021, where it imposed a penalty of EUR 7.8 million on Valve and game publishers Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax for violations of EU competition law, is also essential. The Commission determined that Valve and game publishers prevented the cross-border sale of certain games based on the geographical locations of the users within the European Economic Area. The fines, except for Valve, were reduced for cooperating with the Commission in the investigation concerning so-called “geo-blocking” practices.
What awaits the gaming industry?
Especially in technological industries, companies in a strong position have begun to exert a greater influence in a range of different markets via acquisitions, causing many authorities such as the Turkish Competition Authority, the Commission, FTC, and the US Department of Justice to accelerate their efforts to modernise legislation. The EU's Digital Markets Act (“DMA”) and Digital Services Act (“DSA”), which are expected to come into force in 2023, can be a cornerstone in this context. As the division of work of the Commission and local competition authorities becomes clearer in this sense, it is expected that local competition authorities will be able to focus more comfortably on issues that falls under their purview.
Furthermore, the definition of technology undertakings introduced by the Turkish Competition Authority's Communiqué no. 2022/2 is an indication that transactions made in many technological industries, including the gaming industry, will be examined more closely. The new rules state that the Turkish Competition Board may assess the acquisition of a company in the gaming industry, even if the company has not generated any revenue.8
Similarly, the upcoming decisions concerning companies such as Apple, Sony, Microsoft, and Valve have the potential to deeply affect the entire market. This means that companies operating in the gaming industry now need to follow competition law risks carefully. On the other hand, these developments, which show the authorities monitor technology giants strictly, may be an opportunity for relatively small-scale companies and consumers to make their voices heard.
1 Gaming Industry and Trend Mergers and Acquisition in the Industry from KPMG's Perspective, January 2022.
2 https://www.gov.uk/government/news/microsoft-activision-deal-could-lead-to-competition-concerns Last accessed on September 7, 2022.
3 Peak Oyun Yazılım ve Pazarlama A.Ş.
4 This term is used to classify start-ups that exceed USD 1 billion.
5 Competition Board's decision dated 24.03.2022 and numbered 22-14/215-92.
6 https://gamedaily.biz/article/2341/mergers-and-acquisitions-continue-to-sweep-the-video-game-industry-ma-activity-recap-may-2022 Last accessed on September 7, 2022.
7 A similar case is pending in the UK regarding Apple and Google.
8 An acquisition of a gaming company will require the approval of the Turkish Competition Board if the aggregate Turkish turnover of the transaction parties exceeds TL 750 million (approx. EUR 71.9 million or USD 84.8 million), or the worldwide turnover of at least one of the other parties to the transaction exceeds TL 3 billion (approx. EUR 287.8 million or USD 339.6 million).
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